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Guggenheim's Minerd Sees Rates Falling, Junk Bonds Getting Pricey
Capital flows have come as a result of low yields in Europe, Japan and elsewhere.
In Europe, the risk is that the euro will depreciate. That makes buying U.S. Treasury bonds and other U.S. assets attractive because the local currency could depreciate and interest rates are so significantly higher in the United States than in Europe. On June 6 in Germany, 10-year government bunds traded at 1.35 percent, compared with 10-year U.S. Treasuries at 2.58 percent, so, German investors seeking yield certainly want to look at the United States.
For Japanese investors it is a similar picture — U.S. Treasuries at 2.58 percent look cheap compared with 10-year Japanese government bonds yielding 60 basis points. And legislation in Japan now allows larger allocations overseas by pension funds.
Also from Barron's Income Investing blog, this piece says Japan's enormous pension fund (AUM = $1.26T) will now be allowed to invest more in foreign securities, and will prob'ly become a more significant source of demand for U.S. Treasuries, also helping to put a lid on yields.
Edit: the Japanese pension effect is also mentioned very briefly in the Guggenheim link TSP-T posted ... there's more detail, though, in the Barron's piece.
Comments
Capital flows have come as a result of low yields in Europe, Japan and elsewhere.
In Europe, the risk is that the euro will depreciate. That makes buying U.S. Treasury bonds and other U.S. assets attractive because the local currency could depreciate and interest rates are so significantly higher in the United States than in Europe. On June 6 in Germany, 10-year government bunds traded at 1.35 percent, compared with 10-year U.S. Treasuries at 2.58 percent, so, German investors seeking yield certainly want to look at the United States.
For Japanese investors it is a similar picture — U.S. Treasuries at 2.58 percent look cheap compared with 10-year Japanese government bonds yielding 60 basis points. And legislation in Japan now allows larger allocations overseas by pension funds.
Investment Implications
With no pending crisis expected thanks to central bank liquidity and a bias among Fed policymakers to keep interest rates low, the recent bull market for credit spreads is alive and well, supported by surging capital inflows, which have also helped U.S. stocks hit fresh highs.
http://guggenheimpartners.com/perspectives/media/central-banks-chart-a-course-for-overheating?utm_source=SilverpopMailing&utm_medium=email&utm_campaign=Market Perspectives - June 20
Edit: the Japanese pension effect is also mentioned very briefly in the Guggenheim link TSP-T posted ... there's more detail, though, in the Barron's piece.